4 Reasons Why Estate Planning Is Critical For Business Owners
If you are running a business, it’s easy to prioritize estate planning less than your other business matters. After all, if you’re facing challenges meeting next month’s payroll or your goals for growth over the coming quarter, concerns over your potential incapacity or death can seem far less urgent.
But the reality is considering what would happen to your business in the event of your incapacity or when you die is one of your most pressing responsibilities as a business owner. Although estate planning and business planning may seem like separate tasks, they’re inexorably linked. And given that your business is likely your family’s most valuable asset, estate planning is crucial for your company’s continued success and your loved one’s future well-being.
With a proper estate plan, your team, clients, and family could avoid dire consequences if something should happen to you. Yet these dangers can be easily mitigated using a few basic estate planning strategies. To demonstrate why proper estate planning is so important for business owners, here are four issues your company and family are likely to encounter as a result of poor estate planning, along with the corresponding estate planning solutions you can use to prevent and mitigate those issues.
Issue #1. If your estate plan consists of only a Will, your estate — including your business and its assets — must go through the court probate process when you die.
When creating an estate plan, most people typically think of a Will. While it’s possible to leave your business to someone in your Will, it’s far from the ideal option. That’s because, upon your death, all assets passed through a Will must first go through the court process known as probate.
During probate, the court oversees your Will’s administration to ensure your assets (including your business) are distributed according to your wishes. The problem is, probate can take months, or even years, to complete, and it can also be quite expensive, which can seriously disrupt your operation and its cash flow. It’s also important to consider that probate is a public process, potentially leaving your business affairs open to competitors.
Plus, while your family and team may know how to run your company without you, they might be able to access vital assets, such as financial accounts, once probate is concluded. Even if they could access all of the needed assets, the legal fees charged by the lawyers your family will likely have to hire to help them navigate probate can quickly deplete your company’s coffers. And this is all assuming your Will isn’t disputed during probate, which is a very real possibility, especially with a highly profitable business at stake.
Let’s say your heirs disagree about whom you name to control your business and how the business assets should be divided. In that case, a vicious court battle can ensue and drag on for years, dividing your family and crippling your company.
Given the drawbacks associated with a Will, a much better way to ensure your business’s continued success following your death is by placing your company in a Trust: a Revocable Living Trust, an Irrevocable Trust, or some combination of the two. A Trust is not required to go through probate, and all assets placed within the Trust are immediately transferred to the person or persons of your choice in case of your death or incapacity.
When you die, having your business held in a Trust would allow for the smooth transition of control of your company without the time and expense associated with probate. Plus, Trusts are not open to the public, so your company’s internal affairs would remain private, and the transfer of ownership can take place in your lawyer’s office instead of a courtroom. Finally, especially Irrevocable Trusts, can help shield your business and its assets from creditors and lawsuits, which could threaten your company with you out of the picture.
Issue #2. If you become incapacitated by illness or injury and you haven’t legally named someone to manage your business assets, the court will choose someone for you.
Another issue with relying solely on a Will is that a Will only goes into effect when you die. That means it offers no protection for your business if you’re incapacitated by accident or illness. With just a Will—or no estate plan at all—the court will appoint a financial guardian or conservator to assume control of your business until you recover.
Like probate, the court process associated with guardianship can be long and costly. And whether the guardian is a family member, employee, or outside professional, it’s doubtful that individual would run your business exactly how you would want them to, and this can seriously disrupt your operation. Worse yet, having a court-appointed guardian managing your business affairs can lead to serious conflicts and strife within both your team and family, especially if you’re out for a lengthy period.
One estate planning vehicle that can prevent this is a durable financial power of attorney. A durable financial power of attorney allows you to name the person you would want to run your business and handle all of your other financial affairs if you ever become unable to do so yourself. If you’re sidelined by illness or injury, this person will be granted legal authority to handle your business affairs, such as managing payroll, signing documents, and making financial decisions.
This not only minimizes the expense and delay associated with the guardianship process, but it also ensures that while you are incapacitated, your company and other financial interests will be managed by someone you trust, rather than relying on the court to choose someone for you. Again, having a Trust and a named Trustee would allow your business to be operated in the event of incapacity, without the necessity for any court process.
Issue #3. If your business partner dies and you don’t have a legal agreement that allows you to purchase your partner’s share of ownership in your company, along with a source of liquidity to fund that purchase, you could find yourself in business with your partner’s heirs.
Suppose you share ownership of your business with one or more other people. In that case, it’s crucial that you have a legally binding plan designating what would happen to each partner’s ownership interests should one of you leave the company, get divorced, die, or become incapacitated. Without such a plan in place, along with the funds needed to execute that plan, all sorts of potential problems and conflicts can arise.
For example, should your partner die without such a plan in place and the partner’s children inherit his share of ownership in your business, you could find yourself in business with your partner’s kids or be forced to pay an inflated price for their share of the business. A similar situation could arise should your partner get divorced and your partner’s former spouse is awarded a share of the company in the divorce settlement.